Posted on: July 30th, 2018
All too often, middle market companies with great potential overlook the opportunities that would allow them to become leaders in their field. The big opportunities that companies yearn for require big funding that causes cautious owners to retreat into their turtle shell.
They see two options for financing: bank loans or taking on an investor. The former will not provide enough capital to pursue the opportunity and the latter involves diluting ownership. There is, however, a third option: mezzanine financing.
In this year’s world cup, there has been a shocking amount of upsets. Russia defeated Spain, South Korea defeated Germany, and Japan took down Colombia. As a far and away underdog, these teams usually employ one of two strategies.
The underdog could try and sit back on defense with hopes to quiet the favored team’s offense. However, the underdog will likely not have enough offense to score, similar to how a bank loan doesn’t provide enough funding to score the opportunity.
The second strategy is to just play soccer and hope, which normally results in playing at the pace the favored team chooses. In this case, the underdog concedes control of the game’s rhythm, as a mid market firm taking on an investor concedes ownership.
There has been a third strategy in play in this year’s world cup. Underdogs are placing a priority on possessing the ball. This game plan allows the underdog to both keep control of the rhythm of the game and keep the other team from scoring. With the ball at their feet, the underdog decides the game’s pace and the other team’s offensive weapons are rendered mute without possession.
This game plan mirrors mezzanine financing, the third option for mid market firms pursing growth opportunities.
Mezzanine financing provides the best of both worlds; you receive all the financing you need, far more than a bank loan would provide, and all the while maintain full ownership of the business. Giving up ownership to raise financing means giving the investor a say in how your business runs. Mezzanine financing allows companies to pursue their own unique growth plan whether it’s a new product, new capacity, new people, or a new acquisition.
In addition, mezzanine financing is targeted towards mid market companies so it contains attributes that mid market firms can appreciate, such as no personal guarantee and flexible repayment terms. Plus, when a new opportunity comes along, companies can go back to their mezzanine financier who they have an established relationship with.
Making the first deal with a mezzanine lender can be the beginnings of having a go-to financing partner in the future.
Steps Before Reaching Out to a Mezzanine Lender
- Find an advisor! – They will guide you through all the steps of making a deal
- Clean up financials – Looking more professional will help your firm’s credibility
- Think about your growth story – Why do you want the money? How will it transform your business
- Adjust your EBITDA – try to find where costs may decrease, projecting a higher EBITDA for a larger loan